China's Currency & Trade Surplus
Will Europe join US in pressurizing China on Value of Reminbi
The recent rise in China's trade surplus with Europe is raising concerns and possibilities that Europe may soon join US in pressurizing China to stop undervaluing Reminbi
White House has been under pressure for some time now, from various lobbying groups and some senators to impose sanctions on China for artificially maintaining its currency at a highly undervalued rate to provide an unfair advantage to its exports, while making imports from other countries into China uncompetitive.
China's undervalued currency leads to trade surlpus
At the core of these demands is China's burgeoning trade surplus with US that has already crossed $230 billion last fiscal and is rising at around 20% this year so far (as per data provided by US Census). As a result, economics has been in the fore front of all high level diplomatic discussions between the two countries, the latest among them being the talks between the US delegation lead by Treasury Secretary, Henry Poulson, and the Chinese side headed by Vice Premier Wu Yi, in Washington last month.
US is trying to communicate a hardened stance to its biggest emerging strategic competitor, that has shown the potential of being able to challenge the US as the leading global economy, but Chinese haven’t flinched an inch so far, and the US tactics, based to some extent on its earlier experience with Japan and Germany in the 1980s onwards, do not seem to be having the same success. China is proving to be a tougher nut to crack.
Europe faces similar situation
US may soon find another strong ally, if the trends of China-EU trade continue. Recent reports suggest that China’s trade surplus with EU is growing too, in fact much faster than its surplus with US, at over 70% this year compared to last year, and according to experts, may even exceed the $300 billion mark. Peter Mandelson, the trade commissioner of EU, has termed the trade imbalance “unsustainable”(for details see Financial Times, Asia, June 12, 2007, page 4), and said that he would demand action from Chinese Commerce Minister, Bo Xilai. The coming months may see Europe taking a much more pro-active role in pressurizing China, a development that might come as a great respite to the US. Both EU and US are facing rising concerns over the unsustainability of the situation, and the likelihood of their joining ranks and coordinating efforts is rising by the day.
The fact that India, another dark horse in the region, has allowed its currency to appreciate by nearly 10% in the last few months (for details refer to Reserve Bank of India website) will not help China either. While China has successfully managed the inflationary pressures of its rising forex reserves, albeit at a cost, keeping the pressure of the two most dominant trading blocks at bay may prove to be a tougher task. On the other hand, holding both of them together, without any substantial cost to its economy, is just the stuff Chinese leaders may be delighted to attempt for. If they can pull off this one, it may just be another confirmation of their rising status as a future superpower.
